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Big 4 grocery retailers use no name products to ‘control the market’

CompCom hears how township-based spaza shops struggle to compete on price.

SA’s big grocery retailers were accused of engaging in price wars and anti-competitive behaviour by ramping up investments into private label or no name products, which allegedly squeeze spaza shops in townships out of business.

Panichi Gundo, the chairman of Soweto Brands, a manufacturer and distributor of household goods in Gauteng’s townships of Alexandra and Tembisa, accused Pick n Pay, Shoprite, Massmart and Spar of aggressively pushing private label products, making it difficult for smaller retailers in townships to compete on price.

“Private label products are a big problem in townships. Big retailers have every product category in a private label form, giving them more control of the market,” Gundo told the CompCom’s inquiry into the grocery retail sector on Thursday in Johannesburg.

Private label goods or no name products are cheaper product alternatives to branded ones and generate higher margins, as they don’t require much branded packaging and advertising costs.

Cash-strapped consumers often prefer private label products and retailers use them to drive more feet in stores. Gundo told the inquiry that the big four retailers (Pick n Pay, Shoprite, Massmart and Spar) are reluctant to sell branded goods in townships as “they know they can make big profits with private-label products”.

“Big retailers can compete on price and set prices. There is a distinction between market share and market power. For many shoppers it’s easier and cheaper to switch products, strengthening the power of big retailers.”

He singled out Pick n Pay, saying that 20% of its customer base purchases private label products. “It now wants to push this up to 30%.” Gundo argued that competition law in South Africa is ill-equipped to deal with the proliferation of private-label products. 

The big four retailers have been ramping up store roll-outs in township and rural areas across SA over the last 15 years, taking advantage of regions that lack formal retail trade. In their submissions, grocery retailers (except Shoprite) said their entry into townships has brought quality products and more choice for consumers.

Among the factors that the CompCom’s inquiry will examine is retail giants moving into townships and rural areas. However, its broad purpose is to examine the general state of competition in the grocery retail sector, as it has reason to believe that there are features in the sector that may prevent, distort or restrict competition.

Read: Exclusive lease agreements under the spotlight again

Mphuthi Mphuthi, chairman of the Soweto Business Access, which represents entrepreneurs in townships, argued that the entry of big four retailers in townships is causing more harm than good. 

“Spaza shops are now in survivalist mode,” Mphuti said.

“Big retailers’ operating costs are advantageous. Spaza shops in the townships buy merchandise from wholesalers for cash while big retailers buy theirs on concession for 30, 60 and 90 days. They are able to turn their stock over and over at minimal profits because of their large size.”

Mphuti also criticized the recent roll out of a franchise system (on an experimental basis) in Soweto’s township of Diepkloof, to a convert spaza shop into a Pick n Pay outlet. Pick n Pay said it planned to open five similar shops across Gauteng in the 2016/17 financial year.

“Pick n Pay already operate large stores in Soweto. Now the multibillion retailer is converting spaza shops into Pick n Pay stores, which is really painful,” he said.

Mongezi’s Mazibuko, the executive director of Moagi’s Meat Supply in Sebokeng, Gauteng, supported Mphuti’s views.

Mazibuko told the inquiry that when five shopping malls opened near Moagi’s Meat Supply between 2008 and 2010 –  with retailers including Checkers (operated by Shoprite), Pick n Pay and Cambridge Food (operated by Massmart) that operated and sold meat at cheap prices – its sales have since declined by 10% per annum. It has slashed its workforce from ten to four as a result of slower sales.

“We are unable to pass increases to consumers as our margins are already squeezed,” he said.

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Barry Rykaart

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Ja no well fine – the Zimbabean and nigerian spaze shops thrive but the SA citizens do not – wonder why???

The way I see it is the cheaper prices on no name brands benefit the consumer.The big grocery retailers also employ more employees

Stop complaining because the very people are the ones that buy from these Big 4. You support them that’s why they keep growing like a cancer in the townships.

Catch 22, question that needs to be asked why Spaza shops owned and operated by foreigners are doing well? maybe the issue is not entirely that big business are moving in into townships but it is how Spaza shops that are owned and operated by South Africans are operated / run.

He is wasting his time…every business sector is oligopoly controlled…

I don’t believe that the Big 4 grocery retailers is the problem, all of a sudden every Jack and Joe want to operate a spaza, in one street 3 or 4 of them, what about the competition between these spazas owners, is this not when the foreign owners will be the next targets, and then?

In some streets its like a flea market with all the spaza shops, biggest problem is their is no control, want to buy illegal “cigarettes”, just ask a spaza, and many more items to name.

If the large retailers don’t invest in townships, again they will be branded as colonial shops, only caring for the suburban minority and don’t care about the disadvantage community. They must make up their minds, do they want a mall, or not? but they want their bread butter both sides.

Business is “cut throat”, if you can not innovate, plan and strategist…get a job. Welcome to the world of the “white minority one man business” in the new SA.

You can see why zenophobia is so prevalent in Gauteng – the spaza shops run by South Africans are poor business people and want to live high on the hog and make mega profits.
Why don’t these spaza shop owners get together and create a holistic buying operation and then distribute good purchased in bulk back to the spaza shops – after all that’s how Spar got to where it is today

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